Brexit and trade war continue to make case for bearish view

Sentiment in the British pound has continued to deteriorate through summer, and as the likelihood of a “hard Brexit” becomes more of a reality, expect more weakness in sterling asset classes. This month, the GBPUSD currency pair rate hit 1.2015, its lowest level in 31 months.

With Brexit developments looming large, the impact is starting to be felt in the UK economic data docket. Second-quarter UK GDP showed contraction, coming in at minus 0.2 per cent quarter-on-quarter, while the year-on-year GDP growth rate slowed to 1.2 per cent, down from 1.4 per cent expected. Industrial and manufacturing growth rates came in deeply in the red, hinting at even more contractionary conditions.

Perhaps the only glimmer was a stronger-than-expected inflationary print, which came in at 1.9 per cent year-on-year. This stopped the bleeding for cable long positions and GBP-USD has moved upward of 1.21 in recent days. But this rally seems short-term. In my previous piece, I expected a downward move towards 1.1990 levels and I expect another test of the psychological 1.20 mark beyond the end of this month and into early September. Technically, a breach of these levels would expose the channel between 1.17 and 1.19 in the lead-up to the Brexit deadline on October 31. Barring any shock developments, I don’t foresee upsides past 1.22 to 1.2250 in GBP-USD.

The US-China trade war also had some developments this month. After announcing another round of tariffs on up to $300 billion (Dh1.1 trillion) worth of Chinese goods, last week US President Donald Trump decided to delay the decision of imposing those tariffs, bringing positive risk moods to the market. The Dow Jones rallied from 25,200 levels to post three consecutive days of gains. While my earlier support levels at 25,606 were breached (the Dow hit a low of 25,233 last Thursday) the market bounced back more than 1.95 per cent from my support levels. Expect risk moods to stay strong as long as the trade war stalemate continues. However, judging by the sensitivity of markets, any unfavourable developments would involve sharp sell-offs.

I expect US dollar prospects to remain strong over the next few weeks in the lead-up to the Federal Reserve policy meeting on September 17 and 18. At this meeting many market participants expect a potential further 25 basis point cut, which would mean weakness in the US dollar. The meeting minutes from the most recent decision on July 30 and 31 are due for release tomorrow and this will yield further clues on future rates.

Overall, little has changed. Brexit uncertainty, the trade war and further dovish action from the most powerful central banks make me maintain a bearish view. To compound this, US yields on 10-year bonds dropped below those of the two-year yield for the first time since the debt crisis in 2008. Such an inversion could indicate a longer-term recession.

All eyes will be on the Jackson Hole Economic Symposium beginning this Thursday. Held annually for the past four decades, this meeting is where several of the key global central banks converge to discuss future monetary policy. Developments may echo my views on the position of the global economy throughout the rest of 2019.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti